Top Tax Facts for Canadians Earning Abroad

One of the common misconceptions that many Canadians espouse is that working far and away in different regions around the world may exempt them from paying taxes to the Canada Revenue Agency. In fact, this fallacy can lead to some grave financial troubles and it is therefore important to understand the stipulations for these payments if a citizen decides that he or she wishes to work abroad. Let us look at six lesser-known facts that are important to appreciate.

Taxation is Possible Both at Home and Abroad
Residents will be required to pay taxes on their foreign income; no matter where in the world they are living. This is quite important, for there are those who believe that in fact, such income is not necessary to declare. On the contrary, all residents of Canada are required by law to report and pay the relevant amount of taxable income. However, note here that the word “resident” is used. In more technical terms, the Canada Revenue Agency will require anyone who is considered a “factual resident” to pay taxes.

By definition, a factual resident is one who still maintains tangible ties with Canada. What does this mean? Generally, a factual resident is defined as someone who is only temporarily living or working outside of the country. He or she still possess a valid residence, has a Canadian-issued drivers license and family still exists. Obviously, the way around paying taxes in this case is to no longer exist as a factual resident. However, not that this process may be difficult, for it will entail severing most ties with the country. One must no longer have a legal residence, have established permanent residency elsewhere, possess a valid bank account and in the case of a family, this family must live with the person in question.

From a temporal standpoint, such a position will usually occur after two years (24 months) of not having resided in Canada. However, this is only a rough guide. The CRA will generally begin considering non-resident status after 18-24 months (although this will naturally vary from case to case).

The New Place of Residence Has the Right to Tax Above Canada
This is also quite important to recognize, for it will have dramatic financial implications on the amount of tax owed. Let us say that one is currently working abroad in Spain and has earned a total of 20,000 Euros during the past tax year. Let us say that he or she has subsequently paid out 5,000 Euros to Spain. Although Canada will still be owed their taxes, the taxpayer will be given 5,000 Euros worth of tax credit (the equivalent in Canadian dollars) that will go towards any taxes currently owed to the Canadian government. There may be occasional instances when double tax will be paid, but there are generally rare. Finally, keep in mind that this stipulation will only apply to Canadians who are still considered domestic residents.

The Possibilities of Double Taxation
As mentioned previously, double taxation is rare, but not impossible. This will depend on the arrangements that Canada has made with the country in question. In simpler terms, there is no such concept as “one size fits all” when referring to the possibility of double taxation. So, it is important to appreciate if Canada may (or may not) have any treaties with the country that will affect this. Although some countries will have tax laws which take precedence over one’s obligation to the CRA, there are others that have not entered into such a treaty. This will increase the possibility of one being in a situation when double taxation may occur.

Irrespective if the New Country of Residence Has Higher Tax Rates, Tax Returns are Still Required to be Made to the Canada Revenue Agency
This is another important fact to consider. There are those who believe that as they have already paid their taxes to the country in question (assuming these are higher than in Canada), they are not obliged to file a return with the Canada Revenue Agency. On the contrary, it is still necessary to file a domestic return, for this will illustrate that you have satisfied all of your tax obligations; both at home and abroad. Should one fail to do this, there is a possibility that the resident may risk being audited in the future.

Non-Residents of Canada Will Still be Liable for Taxation if Income is Acquired in Canada
On the other side of the coin, non-residents will nonetheless if they work in Canada (note that this may be different for other countries; Canada requires taxes to be paid regardless). For instance, one who currently holds residential status in France but decides to return to Canada for three months will still be liable to pay taxes resulting from any income earned during those three months.

Still, non-residents will generally cease filing regular returns. However, there are instances (such as dividend payments or income accrued during a stay) that will require taxes to be paid. As a rule of thumb, such income will be taxed at a flat as opposed to a graduated rate.

United States Taxation Concerns
Unlike the methods of the CRA, the residency status applicable to taxation in the United States is a bit more confusing. The person in question will combine the sum of the total number of days which one has resided during the present year, a third of those days from the previous and one-sixth of the days from two years prior. If the total sum is equals to or greater than 183 days (half of a year), one will thereafter be deemed a resident of the United States. There are ways to supersede this designation by filing what is known as a “closer connection” form.

Obviously, these laws and regulations can be tricky for some residents. It is therefore advisable to speak to a qualified tax attorney or financial specialist to determine which (if any) conditions may apply in relation to a specific set of circumstances.

Eric La CaraManaging Partner and Tax Practice manager for Capital Tax in Vancouver and Tokyo. Eric is a U.S. and Japan Personal & Corporate tax specialist with more than 15 years of experience in the area of cross-border structuring and taxation. Eric is charged with developing Capital Tax overall operations and strategic direction using the business and technical skills he has acquired during his professional career in Asia.